Developments in UK insolvency by Michelle Butler

Tag Archives: Enterprise and Regulatory Reform Act

My autumn has been a CPE marathon: SWSCA, the R3 SPG Forum, the IPA roadshow, and the ICAEW roadshow. Thus I thought I’d try to summarise all the legislative and regulatory changes currently in prospect:

Statutory Instruments

Enterprise & Regulatory Reform Act 2013;

Deregulation Bill (est. commencement: May/October 2015);

Small Business, Enterprise and Employment Bill (October 2015 for IP regulation items, April 2016 for remainder);

The exemption for insolvency proceedings from the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (“LASPO”) comes to an end on 1 April 2015;

New Insolvency Rules (est. to be laid in Parliament in October 2015, to come into force in April 2016); and

A plethora of SIs to support the Bankruptcy and Debt Advice (Scotland) Act 2014 (coming into force on 1 April 2015, but, regrettably, I feel so out of the loop on Scottish insolvency now that I don’t dare pass comment!)

Consultation Outcomes

IP fees (consultation closed in March 2014);

DROs and threshold for creditors’ petitions for bankruptcy (consultation closed in October 2014); and

Continuity of essential supplies to insolvent businesses (consultation closed in October 2014).

Revision of SIPs etc.

Ethics Code Review;

SIP 1;

SIPs 16 & 13;

SIP 9 (depending on how the government turns on the issue of IP fees);

New Insolvency Guidance Paper on retention of title; and

Other SIPs affected by new statute.

Enterprise & Regulatory Reform Act 2013

The Insolvency Service’s timetable back in 2013 was that the changes enabled by this Act would be rolled out in 2015/16, but I haven’t heard a sniff about it since. However, the following elements of the Act are still in prospect:

Debtors’ bankruptcy petitions will move away from the courts and into the hands of SoS-appointed Adjudicators (not ORs).

There was talk of the fee being less than at present (£70 plus the administration fee of £525) and of it being paid in instalments, although my guess is that the Adjudicator is unlikely to deal with an application until the fee has been paid in full.

The application process is likely to be handled online. Questions had been raised on whether there would be safeguards in place to ensure that the debtor had received advice before applying. This would appear important given that the Adjudicator will have no discretion to reject an application on the basis that bankruptcy is not appropriate: if the debtor meets the criteria for bankruptcy, the Adjudicator must make the order.

The ERR Act is also the avenue for the proposed revisions to Ss233 and 372 of the IA86 – re. continuity of essential supplies – as it has granted the SoS the power to change these sections of the IA86.

The Deregulation Bill

Of course, the highlight of this Bill is the provision for partial insolvency licences. It was debated in the House of Lords last week (bit.ly/1tBmMhe – go to a time of 16.46) and whilst I think that, at the very least, the government’s efforts to widen the profession to greater competition are nonsensical in the current market where there is not enough insolvency work to keep the existing IPs gainfully employed, my sense of the debate is that the provision likely will stick.

I was surprised that Baroness Hayter’s closing gambit was to keep the door open at least to press another day for only personal insolvency-only licences (rather than also corporate insolvency-only ones). Will that be a future compromise? What with the ongoing fuzziness of (non-FCA-regulated) IPs’ freedom to advise individuals on their insolvency options and the rareness of bankruptcies, I wonder if the days in which smaller practice IPs handle a mixed portfolio of corporate and personal insolvencies are numbered in any event.

The Deregulation Bill contains other largely technical changes:

Finally, the Minmar/Virtualpurple chaos will be resolved in statute when the need to issue a Notice of Intention to Appoint an Administrator (“NoIA”) will be restricted to cases where a QFCH exists.

The consent requirements for an Administrator’s discharge will be amended so that, in Para 52(1)(b) cases, the consent of only the secured creditors, and where relevant a majority of preferential creditors, will be required. At present Para 98 can be interpreted to require the Administrator also to propose a resolution to the unsecured creditors.

A provision will be added so that, if a winding-up petition is presented after a NoIA has been filed at court, it will not prevent the appointment of an Administrator.

In addition to the OR, IPs will be able to be appointed by the court to act as interim receivers over debtors’ properties.

It will not be a requirement in every case for the bankrupt to submit a SoA, but the OR may choose to request one.

S307 IA86 will be amended so that Trustees will have to notify banks if they are seeking to claim specific after-acquired property. The government envisages that this will free up banks to provide accounts to bankrupts.

The SoS’ power to authorise IPs direct will be repealed, with existing IPs’ authorisations continuing for one year after the Act’s commencement.

The Deeds of Arrangement Act 1914 will be repealed.

The Small Business, Enterprise and Employment Bill

I won’t repeat all the provisions in this Bill, but I will highlight some that have created some debate recently.

The proposed new process for office holders to report on directors’ conduct proved to be a lively topic at the RPB roadshows. There seemed to be some expectation that IPs would report their “suspicion – not their evidenced belief – of director misconduct” (per the InsS slide), although this was downplayed at the later R3 Forum. My initial thoughts were that perhaps the Service was looking to produce a kind-of SARs-reporting regime and I wondered whether that might work, if IPs could have the certainty that their reports would be kept confident.

However, I suspect that the Service had recognised that IPs would have difficulty with the proposed new timescale for a report within 3 months, but hoped that this would be mitigated if IPs could somehow be persuaded to report just the bare essentials – to enable the Service to decide whether the issues merit deeper enquiries – rather than putting them under a requirement to collect together substantial evidence. I suspect that the Service’s intentions are reasonable, but it seems that, at the moment, they haven’t got the language quite right. Let’s hope it is sorted by the time the rules are drafted.

Phillip Sykes, R3 Vice President, gave evidence on the Bill to the Public Bill Committee a couple of weeks ago (see: http://goo.gl/V1XSbX or go to http://goo.gl/jSTmI0 for a transcript). Phillip highlighted the value of physical meetings in engaging creditors in the process and in informing newly-appointed office holders of pre-appointment goings-on. He also commented that the proposed provision to empower the courts to make compensation orders against directors on the back of disqualifications seems to run contrary to the ending of the LASPO insolvency exemption and that the suggestion that certain creditors might benefit from such orders offends the fundamental insolvency principle of pari passu. Phillip also explained the potential difficulties in assigning office holders’ rights of action to third parties and described a vision of good insolvency regulation. Unfortunately, he was cut off in mid-sentence, but R3 has produced a punchy briefing paper at http://goo.gl/mBeU30, which goes further than Phillip was able to do in the short time allowed by the Committee.

Last week, a new Schedule was put to the Public Bill Committee (starts at: http://goo.gl/sY5QUG), setting out the proposed amendments to the IA86 to deal with the abolition of requirements to hold creditors’ meetings and opting-out creditors. A quick scan of the schedule brought to my mind several queries, but it is very difficult to ascertain exactly how practically the new provisions will operate, not least because they refer in many places to processes set out in the rules, which themselves are a revision work in progress.

IP Fees

The consultation, which included a proposal to prohibit the use of time costs in certain cases, closed in March 2014 and there hasn’t exactly been a government response. All that has been published is a ministerial statement in June that referred to “discussing further with interested parties before finalising the way forward” (http://goo.gl/IbQsLd). The recent events I have attended indicate that the Service’s current focus is more on exploring the value of providing up-front fee estimates together with creditors’ consent (or non-objection) to an exceeding of these estimates, rather than restricting the use of the time costs basis. I understand that the government is expected to make a decision on how the IP fees structure might be changed by the end of the year.

Revision of SIPs etc.

I have Alison Curry of the IPA to thank for sharing with members at the recent roadshows current plans on these items:

A JIC review of the Insolvency Code of Ethics has commenced. Initial findings have queried whether the Code needs to incorporate more prescription, as it has been suggested that the prevalence of “may”s, rather than “shall”s, can make it difficult for regulators to enforce. The old chestnuts of commissions, marketing and referrals, also may be areas where the Code needs to be developed.

Although RPB rules include requirements for their members to report any knowledge of misconduct of another member, it has been noted that, of course, this is not effective where the misconduct involves a member of a different RPB. Therefore, the JIC is looking to amend SIP1 with a view to incorporating a profession-wide duty to report misconduct to the relevant RPB or perhaps via the complaints gateway.

As expected, SIP16 is being reviewed in line with Teresa Graham’s recommendations. This is working alongside the efforts to create the Pre-pack Pool, which will consider connected purchasers’ intentions and viability reviews. A consultation on a draft revised SIP16 is expected around Christmas-time. I had heard that the target is that a revised SIP16 will be issued by 1 February 2015 and the Pool will be operational by 1 March 2015, but that seems a little optimistic, given the need for a consultation.

SIP13 is ripe for review (in my opinion, it needed to be reviewed after the Enterprise Act 2002!) and it is recognised that it needs to be revised in short order after SIP16.

A new IGP on RoT has been drafted and is close to being issued. We received a preview of it at the IPA roadshow. To be honest, it isn’t rocket science, but then IGPs aren’t meant to be.

I thought I would take a look at where we’ve got to on a few of the current developments in insolvency regulation:

• The Deregulation Bill: who says limited IP licences are a good idea?
• SIP3.2 (CVA): a preview of the final SIP3 (IVA) or an ethical minefield?
• The JIC Newsletter: grasping the nettle of the commissions issue
• Insolvency Service update to the BIS Committee: promises, promises!

Insolvency features relatively insignificantly in the wide-ranging draft Deregulation Bill, the so-called Henry VIII Power attracting far more attention, so in some respects it is quite surprising that insolvency got a mention in the Committee report at all. However, the background to this report included oral evidence sessions, one of which was attended by Andrew Tate representing R3’s Small Practices Group. A recording of the session can be accessed at: http://www.parliamentlive.tv/Main/Player.aspx?meetingId=14073&player=windowsmedia – insolvency pops up at c.50 minutes.

Andrew had a chance to express concerns about the draft Bill’s introduction of IP licences limited to personal or corporate insolvency processes. He raised the concern, which I understand is shared by many IPs, that IPs need knowledge of, and access to, all the tools in the insolvency kit, so that they can help anyone seeking a solution, be they a company director, a practice partner, or an individual, and some situations require a combination of personal, corporate and/or partnership insolvency solutions.

What seemed to attract the attention of the Committee most, however, was learning that there had been no public consultation on the question. It’s worth hearing the nuanced evidence session, rather than reading the dead-pan transcript. It fell to Nick Howard, who was not a formal witness but presumably was sitting in the wings, to explain that there had been an “informal consultation”, which had revealed general support, and I thought it was a little unfair that a Committee member seemed sceptical of this on the basis that they had not heard from anyone expressing support: after all, I don’t think that people tend to spend time shouting about draft Bills with which they agree.

Personally, I do not share the same objections to limited licences, or at least not to the same degree. I see the value of all IPs having knowledge of both personal and corporate insolvency, but even now not all fully-licensed IPs have had experience in all fields, so some already start their licensed life ill-equipped to deal with all insolvency situations. I believe that there are more than a few IPs who have chosen a specialist route that really does mean that practically they do not need the in-depth knowledge of all insolvency areas, and, given that they will not have kept up their knowledge of, and they will have little, if any, useful experience in, insolvency processes outside their specialist field, does it really do the profession or the public any favours for them to be indistinguishable from an IP who has worked hard to maintain strong all-round knowledge and experience? Surely it would be more just and transparent for such specialists to hold limited licences, wouldn’t it?

From my perspective as a former IPA regulation manager, I believe that there would also be less risk in limited licences. As things currently stand, an IP could have passed the JIEB Administration paper years’ ago (even when it was better known as the Receivership paper) and never have touched an Administration in his life, but (Ethics Code principle of professional competence aside) tomorrow he could be talking to a board of directors about an Administration, pre-pack, or CVA. Personally, I would prefer it if IPs who specialise were clearly identified as such. Then, if they encountered a situation that exceeded their abilities, which they would be less likely to encounter because everyone could see that they had a limited licence, at least they would be prohibited from giving it a go.

Clearly, with so many facets to this issue, it is a good thing that the Committee has recommended that the clause proposing limited licences be the subject of further consultation!

The other insolvency-related clauses in the draft Bill have sat silently, but presumably if limited licences stall for further consultation, the other provisions – such as fixing the Administration provisions that gave rise to the Minmar/Virtualpurple confusion and modifying the bankruptcy after-acquired property provision, which allegedly is behind the banks’ reluctance to allow bankrupts to operate a bank account – will gather dust for some time to come.

SIP3.2 (CVA): a preview of the final SIP3 (IVA)?

I found the November consultation on a draft SIP3.2 for CVAs interesting, as I suspect that this gives us a preview of what the final SIP3 for IVAs will look like: the JIC’s winter 2013 newsletter explained that the working group had reviewed the SIP3 (IVA) consultation responses to see whether there should be any changes made to the working draft of SIP3 (CVA). Consequently, it seems that there will be few changes to the consultation draft of SIP3 (IVA)… although that hasn’t stopped me from drawing from my own consultation response to the draft SIP3 (IVA) and repeating some of those points in my consultation response to the draft SIP3 (CVA). I was pleased to see, however, that few of my issues with the IVA draft had been repeated in the CVA draft – it does pay to respond to consultations!

I’ve lurked around the LinkedIn discussions on the draft SIP3.2 and been a bit dismayed at the apparent differences of opinion about the role of the advising IP/nominee. Personally, I believe that the principles set out in the Insolvency Code of Ethics and the draft SIP3.2 handle it correctly and fairly clearly. In particular, I believe that an IP’s aim – to seek to ensure that the proposed CVA is achievable and strikes a fair balance between the interests of the company and the creditors – as described in Paragraph 6 of the draft SIP3.2 – is appropriate (even though, as often it will not be the IP’s Proposal, this may not always be the outcome). In my mind, this does not mean that the IP is aiming for some kind of mid-point between those interests, as the insolvent company’s interests at that time necessarily will have particular regard for the creditors’ interests, and so I do not believe that the SIP supports any perception that the advising IP/nominee sides inappropriately with the directors/company. However, given that apparently some have the perception that this state exists, perhaps it would be worthwhile for the working group to see whether it can come up with some wording that makes the position absolutely clear, so that there is no risk that readers might misinterpret the careful responsibility expected of the advising IP/nominee.

I would urge you to respond to the consultation, which closes on 7 January 2014.

The JIC Newsletter: all bark and no bite?

Well, what do you think of the JIC’s winter 2013 newsletter? I have to say that, having been involved in reviewing the fairly inconsequential reads of previous years whilst I was at the IPA, I was pleasantly surprised that at least this newsletter seemed to have something meaningful to say. Personally, I wish it had gone further – as really all it seems to be doing is reminding us of what the Ethics Code already states – but I am well aware of the difficulties of getting something even mildly controversial approved by the JIC members, their respective RPBs, and the Insolvency Service: it is not a forum that lends itself well to the task of enacting ground-breaking initiatives. And anyway, if there were something more than the Ethics Code or SIPs that needed to be said, a newsletter is not the place for it.

Bill Burch quickly off the mark posted his thoughts on the Commissions article: http://complianceoncall.blogspot.co.uk/2013/12/dark-portents-from-jic-for-commissions.html, which pretty-much says it all. Personally, I hope that this signifies a “right, let’s get on and tackle this issue!” attitude of revived enthusiasm by the regulators, but similarly I fear that some offenders may just seem too heavy-weight to wrestle, at least publicly, although that does not mean that behaviours cannot be changed by stealth. Many would shout that this is unfair, but it has to be better than nothing, hasn’t it?

My main concern, however, is how do the regulators go about spotting this stuff? Unless a payment is made from an insolvent estate, it is unlikely to reach the eyes of the monitor on a routine visit. It’s all well and good asking an IP where he gets his work from, if/how he pays introducers, and reviewing agreements, but if someone were intent on covering their tracks..? I know for a fact that at least one of the examples described in the JIC newsletter was revealed via a complaint, so that would be my personal message: if you observe anyone playing fast and loose with the Ethics Code, please take it to the regulators, and if you don’t want to do that personally, then get in touch with R3 and they might help do it for you. If you don’t, then how really can you cry that the regulators aren’t doing enough to police your competitors?

However, the theoretic ease with which inappropriate commissions could be disguised and the multitude of relatively unregulated hangers-on to the insolvency profession, preying on the desire of some to get ahead and the fear of others of losing out to the competition, do make me wonder if this issue can ever be tackled successfully. But the JIC newsletter at least appears to more clearly define the battle-lines.

Insolvency Service Update to the BIS Committee: all good things come to those who wait

Regarding “continuation of supply”, which was included in the Enterprise and Regulatory Reform Act 2013 but which requires secondary legislation to bring it into effect, Ms Swinson stated: “We intend to consult later this year on how the secondary legislation should be framed”. I had assumed simply that the Insolvency Service’s timeline had slipped a bit – understandably so, as there has been plenty going on – but I became concerned when I read the interview with Nick Howard in R3’s winter 2013 Recovery magazine. He stated: “We are in the process of consulting on exactly how that [the supply of IT] works because the power in the Act is fairly broad and we want to ensure we achieve the desired effect”. Have I missed something, or perhaps there’s another “informal consultation” going on?

I’m guessing the Service’s timeline has slipped a bit in relation to considering Professor Kempson’s report on fees, however, as Ms Swinson had planned “to announce the way forward before the end of the year” in relation to “a number of possible options for addressing this fundamental issue [that “the market does not work sufficiently where unsecured creditors are left to ‘control’ IP fees”], by both legislative and non-legislative means. Still, I imagine this isn’t far away, albeit that Ms Swinson is now on maternity leave.

This might be old news to those with their ears to the ERA ground, but it was news to me that the Insolvency Service will be implementing the Government’s Digital by Default strategy in the RPO “with a digital approach to redundancy claims anticipated to be launched in the autumn of 2014”. My experience as an ERA administrator may date back to the 1990s when people were comforted more by the feel of paper in their hands, but I do wonder how well the news will go down with just-laid-off staff that they need to go away and lodge their claims online. A sign of the times, I guess…

Finally, don’t mention the Draft Insolvency Rules!

No summary of regulatory goings-on would be complete without referring to the draft Insolvency Rules, on which the consultation closes on 24 January 2014. And no, I’ve still not started to look at them properly; it feels a bit futile even to think about starting now. But then, if we don’t pipe up on them now, we won’t be able to complain about the result, even if that may be yet years’ away…

Yesterday, the Government published its response to the House of Commons BIS Committee’s February 2013 report on the Insolvency Service. My immediate reaction is: it looks like the Service is going to be very busy over the summer!

There is a BIS/Insolvency Service joint project to review potential funding models, which is also considering fee structures. The response states that they are also exploring “the possibility of fees being paid by instalments and/or linked to the discharge of the bankrupt” (paragraph 33). I thought that was an interesting addition to the mix of ideas: so instead of an automatic 1-year discharge, it could be extended until the bankrupt has paid his/her instalments? It would mean fewer recoveries via IPOs/IPAs, wouldn’t it, so the OR would have to write off more administration fees..?

CDDA work

Reference is made to the efforts of R3, the RPBs, IPs and the Insolvency Service “to simplify reporting processes, enhance guidance and ensure improved feedback on the outcomes of ‘possible misconduct’ reports provided by IPs” (paragraph 36). Personally, I feel that the efforts to put D-forms online are one step forward compared to the two steps back of the Service’s revised guidance on CDDA reporting, which adds yet more to the document/information wish-list when submitting D-reports. However, I think the Service’s presentations at courses and conferences on what they are looking for in D-reports and what IPs can dismiss as immaterial are useful – I would recommend them – albeit in some respects the points are difficult for IPs to apply in practice for fear of being criticised for using their professional judgment too liberally.

As an aside, I was interested to note the proportion of D1 reports to non-compulsory corporate cases: 35% in 2010-11 and 28% in 2011-12 (paragraph 42) – perhaps useful benchmarks for IPs, although of course every IP has his/her own make-up of appointments that will lead to more or less D1s in his/her particular case.

I found the Service’s confession of staff turnovers quite alarming. Within its Investigation and Enforcement teams in recent years, they reported a 38% internal turnover of employees, with over 60% in front-line investigation roles (paragraph 40). It is not surprising that, along with the impact of austerity measures on resources, “investigation and enforcement outputs have dipped since 2010”. The report sounds positive, however, that perhaps a corner has been turned with the agency “delivering closer to expectations” in the second half of this year (paragraph 41).

Despite these positive sounds, the response includes: “given the concerns raised by the Committee and feedback from insolvency practitioners on the numbers of ‘possible misconduct’ reports being taken forward, the Insolvency Service intends to look again at how it assesses and prioritises cases. This will be done during 2013/14, with the goal of ensuring greater transparency on its processes and shared expectations on its investigation and enforcement outputs” (paragraph 48).

Pre-packs

It seems to me that there is a shift away from focussing, excessively in my view, on SIP16 compliance towards investigating potential abuse of the pre-pack process – personally, I welcome this shift.

However, I feel that the response unsatisfactorily addresses the Committee’s recommendation that the Service’s SIP16 monitoring should include “feedback to each insolvency practitioner… where SIP16 reports have been judged to be non-compliant”. The response simply refers to: (i) the Service’s education programme “including a webinar” to ensure that the requirements of the SIP are understood; (ii) reporting significant issues to the relevant RPB; (iii) revising SIP16; and (iv) Dear IP 42 issued in October 2009. It seems nonsensical to me that the Service would spend time reviewing the SIP16s, deciding whether they are compliant or not including, as acknowledged in the report “minor and technical” non-compliances, and then do not inform the IPs direct of their conclusion. Fine, report the serious cases to the relevant RPB, but how does the Service expect IPs to learn by their mistakes if they are not told about them?!

The Government response highlights proposed changes to SIP16, which “will require IPs to move faster in informing creditors about pre-packs. It will also require a specific and explicit statement by the IP to confirm that a pre-pack was the most appropriate method of producing the best return for creditors” (paragraph 58). Personally, those proposed changes to the SIP, as appearing in recent RPB consultation, do not concern me, but does that mean that the rejection of the lengthening of the SIP16 bullet point information list (as per the consultation draft SIP16) will not be a deal-breaker with the Service? The Government doesn’t seem too concerned about adding to the list. I think I know what my consultation response will be…

As I mentioned, I am pleased to see the Service’s apparent new focus on cases “where there is evidence of material detriment to creditors as a result of IP behaviours” (paragraph 60) and “targeted investigation… going beyond simply reviewing SIP compliance to assess potential abuse of the pre-pack procedure” (paragraph 63). The Service “has been investigating, on a risk assessed basis, the use of pre-packs by small to medium sized IP firms where there have been a number of previous instances of breaches of SIP16 [and] monitoring the relationship between IPs and online introducers to see whether the pre-pack process is being abused through misleading advertising” (paragraph 52). I hope that this monitoring moves on to getting under the skin of the cases, so that it doesn’t just turn into a statistical review black-marking IPs simply working in a particular market irrespective whether there is any real abuse – and for that, perhaps we should look to the RPBs dealing with the Service’s referrals – but overall I say “Hurrah!”

The Government response also confirms that a review into pre-packs “will be launched in the summer after the Service has reported on its current monitoring of pre-packs… and the new SIP 16 controls on pre-packs have been put in place” (paragraph 51).

Interaction with the RPBs and complaints about IPs

Nestled within the pre-pack comments is this: “The Insolvency Service is strengthening its role as the oversight regulator of the IP profession. A new senior post to lead related activities will be filled shortly. This will include working with the insolvency regulators to drive action on commitments that will enhance enforcement and improve confidence in the proper use of insolvency frameworks” (paragraph 57).

The response also states that “common sanction guidance is close to implementation. This is expected to be in place over coming months” (paragraph 58). It also refers to a summer implementation of the new complaints gateway, which will mean that “in future virtually all complaints about IPs will come first to the Insolvency Service, where they will be subject to an initial assessment before being forwarded, as appropriate, to the relevant RPB for action” (paragraph 73). We also await the Insolvency Service’s Annual Review of IP Regulation.

S233 continuation of supply changes

A short one this: the Enterprise and Regulatory Reform Bill – now “Act”, as the Bill received Royal Assent on 24 April 2013 (see https://www.gov.uk/government/news/enterprise-and-regulatory-reform-bill-receives-royal-assent – although that’s another story entirely) – includes the power to create of secondary legislation to extend the scope of S233. However, we still await the consultation before the Government decides “how and in what terms to exercise the new powers” (paragraph 70).

Review of IPs’ fees

Another short one: Professor Kempson’s review “is expected to produce final recommendations for consideration by the Secretary of State and the Minister with responsibility for insolvency issues by the end of June 2013” (paragraph 77).